Harberger. Monopoly.

· Triangle in the figure is considered welfare cost

· Monopoly must look at P relative to MC · MC is very hard to measure in real world · With constant returns to scale, in the LR AC=MC, so AC becomes a proxy for MC

· Look at TR rectangles · If demand was more inelastic, you would use less resources to solve the $1 million in excess profits · If rising costs, also use less resources to solve the $1 million in excess profits · Elasticity of 1, overstating how many resources have to be moved and the welfare cost · He overstates the welfare cost and the resources that have to be transfered

· Economic profits and accounting profits aren’t the same, but data using accounting profits · Must pick a period of relatively low and stable inflation because it distorts profits, profits may be inflation instead of real profits · Must pick a period roughly in LR equilibrium because less shocks, want to attribute every dollar only to monopoly · Research and development and advertising is expensed immediately but benefits come in the future; this makes large companies look profitable and new companies as poor · Mergers can make monopoly profits disappear because when you sell the firm it capitalizes monopoly profits, after merger normal ROR · Problem with PICKING time period, can pick up biases · LONG INFLATION MERGES RESEARCH

1. Elasticity of demand=1, overstates distortion 2. Constant returns to scale, which if isn’t true reduces the scale of distortion 3. Including things from disequilibrium as if they’re caused by monopoly 4. Counts intermediate products as final products, overstating how many resources have to move · So important because he’s not looking to get a specific answer · If you disagree, you can argue what doesn’t make sense · All of these overestimate the amount of resources that have to be transferred to fix the capital “misallocation” · CONSTANT ELASTICITY FINAL DISEQUILIBRIUM

· If the size of welfare distortion is so small, it makes sense not to start every analysis as monopoly powers have a large presence therefore… · Instead, start with the problem we face and is it a reasonable response · This will show that things we consider monopolistic are low cost solutions · Example, vertical integration—franchising solutions are cheaper solutions to rip of problems

· Tariffs, excise taxes, subsidies, agricultural pricing, trade unions · The government prevents competitors from coming into the industry

1. Elasticity of demand=1, overstates distortion 2. Constant returns to scale, which if isn’t true reduces the scale of distortion 3. Including things from disequilibrium as if they’re caused by monopoly 4. Counts intermediate products as final products, overstating how many resources have to move · So important because he’s not looking to get a specific answer · If you disagree, you can argue what doesn’t make sense · All of these overestimate the amount of resources that have to be transferred to fix the capital “misallocation” · CONSTANT ELASTICITY FINAL DISEQUILIBRIUM